THE INSTITUTE OF CHARTERED ACCOUNTANTS OF PAKISTAN

EXAMINERS’ COMMENTS

SUBJECT SESSION
Management Accounting Final Examination - Summer 2012

General:

The performance this time was considerably better than the previous attempt. Questions
Nos. 2, 5 and 6 were quite easy and contributed significantly towards the betterment of
the overall result. The performance in the remaining questions was quite poor as most of
the students failed to plan their answers in advance although the concepts that were tested
were quite simple.

Q.1 (a) In this part the candidates were required to compare two options i.e.
introduction of a new product to utilize the excess capacity was to be
compared with the option of renting out the excess capacity to a third party.

As mentioned in the general comments, most candidates failed to plan their

answers and followed a “think as you do” approach.

The first step was to simply calculate the contribution margin at three
different demand levels. Surprisingly, many students did not bifurcate the
total cost between fixed and variable. Many of them calculated the
contribution margin on the Demand Level of 18000 units without realizing
that the production capacity was limited to 16800 units.

In the rental option, many candidates considered the revenues only. The
variable costs associated with the option were ignored by them although it
was clearly mentioned in the question that the lessee will use the company’s
labour at no additional cost.

(b) This part of the question required identification of other matters (besides
revenues and cost) which should be considered in deciding between the two
options. In this part also most of the students displayed poor knowledge and
missed important points such as chances of interference and disputes in the
case of rental option and the risk that the new product may not be able to
capture the market as per the projections.

Q.2 This was a straightforward question that required determination of production

mix that would maximize the monthly contribution and also graphical
presentation of the relevant constraints. It was normally well attempted but
majority of the students ignored the important constraint whereby the company
was required to produce a minimum of 100 units of each of the two products and
hence missed out some easy marks.

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 Examiners’ Comments on Management Accounting – Final Examination Summer 2012

Q.3 This again was a simple question. At this level, the students must be well versed
with the concepts which were tested in this question. Though many students were
able to secure full marks, most of the remaining made all sorts of simple
calculation mistakes. Those students who planned their answers well must have
been able to complete their answer in less than 15 minutes. However, probably
due to lack of practice in solving such questions, many candidates adopted
unnecessarily lengthy procedures and in the process, made lot of mistakes.

Q.4 This was the only question which could be termed as a difficult one, in the whole
paper. It required determination of the product mix that would optimize profit in a
scenario whereby the existing product had a highly elastic demand and the
company was considering introduction of a new product as spare capacity was
available.
Very few students were able to pick the gist of this question. They computed the
contribution margin (CM) per hour for the proposed new product Gamma and for
each of the three demands levels of the existing product Alpha. However, very
few of them were able to understand the next step i.e. to first produce Alpha
where CM per hour was higher than that of Gamma and utilize the remaining
production capacity for converting Beta (the intermediate product) into Gamma
and to first produce Gamma where CM per hour for Gamma was in excess of
Alpha and utilize the remaining capacity for production of Alpha.
The other most common and crucial mistakes were as follows:

• The fact that the production capacity of the new facility installed to convert
Beta into Gamma was limited to 60,000 units was not taken into
consideration.

• Many students were unable to comprehend that for calculating CM per hour
for Gamma, only the number of hours required to produce Beta were relevant
as the conversion from Beta to Gamma would take place in the new facility.

• Most students treated variable cost of Beta as the transfer price without
considering the loss of CM due to decrease in the production of Alpha.
Q.5 This was a simple question on activity based costing. Most of the students were
able to secure good marks. The important observations of the examiners are as
follows:

• Some candidates could not comprehend the fact that the total expenses for the
quarter pertained to the entire activity whereas product-wise data was
available for 2 main products only. Consequently, they tried to allocate the
entire amount of expenses to the two products.

• Quite often, the admin and selling expenses were included in factory
overheads.
• Many students carried out unnecessarily lengthy calculations, for example,
instead of allocating total cost of the various departments to the products in
one step, they allocated each and every cost individually and hence wasted a
lot of their valuable time.

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 Examiners’ Comments on Management Accounting – Final Examination Summer 2012

Q.6 In part (a) the students were required to determine the feasibility of accepting a
factoring proposal. The most common error was that instead of making all
calculations consistently either on monthly or on annual basis, many candidates
carelessly mixed up monthly costs with annual costs. Most of the students
displayed their understanding of the concepts but lacked practice of solving such
question.

Part (b) was based on the qualitative side of the decision but very few students
seemed to have concentrated on this aspect and consequently performed poorly.

(THE END)

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